Making money by betting on dying malls

Some are hoping to make a lot of money with the decline of shopping malls:

It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing…

Many of the malls are anchored by the same struggling tenants, like Sears, J.C. Penney and Macy’s, and large-scale closures could be “disastrous” for the mortgage-backed securities. In the worst-case scenario, the BBB- tranche could incur losses of as much as 50 percent, while the BB portion might lose 70 percent.

I’d love to see some analysis of whether this is a good development: it doesn’t sound like this will break the mortgage industry in the same way as the subprime mortgage crisis, clearly some investors have learned something from the past, yet the default of shopping malls can have a big effect on the local economy and community.

There is an interesting summary of the fate of the American shopping mall in the final paragraph of the article:

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”

This can’t be good in the short term, particularly if the retail money vanishes into the Internet ether. In the long run, it does hint at a very bifurcated retail experience in coming decades: wealthier places where shopping malls still thrive and are popular and other places where there is nothing but big box stores, the occasional strip mall, and online shopping.

Automated jobs could reduce tax revenues

I don’t know how accurate these figures are but it is an interesting argument: people might worry about losing jobs to automation but what about losing tax revenues?

The United States is in danger of losing more than one-third of its tax base thanks to increasing automation in both manufacturing and service sectors. Self-driving vehicles, self-serve kiosks, increases in manufacturing and energy production efficiency, and declining retail numbers all contribute to what is likely going to be a significant problem in the coming decades…

Conservative estimates put future job losses at 20 million with some estimates going up to as high as 70 million. When someone loses their job, they stop paying taxes, while their employers stop paying payroll and other types of taxes at the same time. Compounding the issue is the fact that many people who lose their jobs start to depend on the economic support of the government, along with their families…

A growing population and dwindling jobs will result in much higher levels of unemployment in working-age adults than we see now. To top it off, the number of people on either side of the working-age spectrum (under-18, over-67) are growing substantially. Something has to give at some point, whether that means the advent of a basic income system or substantial corporate/capital taxes, the transitional period we are currently in cannot last forever.

Something to keep an eye on. I could imagine this causing particular problems at the local level as less federal and state money is available at the same time that residents may have a harder time paying property taxes and other local fees.

Bad predictions: actively managed equity funds

An article about diversity in ETFs includes this figure about the prediction abilities of those who pick stocks:

A study by S&P Dow Jones Indices found that from 2006 to mid-2016, 87 percent of all actively managed U.S. equity funds underperformed the market.

In other words: not good. This is plenty of other evidence about this; see the work of Phillip Tetlock. Hence, the rise of ETFs.

One thing that this article on ETF does not address: if more business has moved to different financial instruments, what has happened to all of those stock pickers and hedge fund managers?

A college degree leads to more geographic mobility

Americans with a college degree are more likely to leave where they grew up and end up in metropolitan regions:

Today, people with a college degree are more likely than they used to be to move to metropolitan regions with good jobs and other people like them, and this means both that those regions do better over time and that the return on that education is even greater. Almost half of college graduates move out of their birth states by age 30, according to Moretti. Only 27 percent of high school graduates do. As booming cities draw in new college-educated workers, employers seeking these workers follow, and cities continue to gain strength like magnets. This improves the prospects of everyone in the region, including those without college degrees. The working-class strongholds that once prospered without college-educated workers, on the other hand, are doing worse and worse, as computers and robots replace the workers whose jobs haven’t been sent overseas, and, as a result, an oversupply of labor brings down wages for everyone still there.

It’s not just that a college degree leads to higher earnings or more opportunities; it is also that people with college degrees tend to cluster in certain locations. Even in a world where technology could theoretically allow workers to be far away from their workplaces, the clustering in desirable cities of employers, cultural scenes, and places to live with a high quality of life is linked to education levels.

Another side effect of this clustering is that cities tend to have diverse and vibrant economies while smaller communities simply can’t access multiple options. Thus, even if a smaller community has a single thriving industry, this may not work well:

Focusing on one type of industry could be a successful strategy; Warsaw, Indiana, a relatively small town in the northern part of the state, is the orthopedic capital of America, with dozens of orthopedic device companies small and large located there and a bustling economy as a result. Elkhart, Indiana is the epicenter of the recreational vehicle industry, and manufacturers and suppliers are located there, creating good jobs when the economy is doing well. Cities and towns may be able to convince a cluster of a certain type of companies to locate there, and reverse their decline. “Every place has to look at its comparative advantage, and find a niche,” Ross DeVol, the chief research officer at the Milken Institute, told me.

Having lived near Elkhart during the financial crisis, such a strategy can look good in boom times but be disastrous in down times.

Looking toward the future, are there any particular industries or sectors that would be willing to spread out geographically in order to build stronger American communities? This might limit their profits or make it difficult to attract certain employees but could it be worthwhile to invest in smaller communities in the long run (either for the communities or also for a competitive advantage)? Even sectors like health care are finding it difficult to maintain facilities in small towns because of the advantages that consolidation and economies of scale offer.

Are we already to the point where people live in rural areas because (1) they are “stuck” there or (2) because they are already well-off and have the resources or option to live there?

Trying to split Naperville’s downtown streetscape improvement costs

Downtowns need regular upkeep and maintenance but paying for streetscape improvements can be a tricky matter:

In an estimated $15 million project that’s expected to take six years once it begins, the city plans to upgrade sidewalks, install new benches and street furniture and enhance street corners throughout its commercial core…

City staff members are proposing the work be paid for over 15 years, with the city contributing half and downtown property owners the other half.

They say it’s a fair cost distribution because a strong downtown improves the city as a whole…

Problem is, those same downtown property owners who could be asked to foot the bill for sidewalks and benches also are still paying off the Van Buren Avenue parking garage — and will be until 2021, 20 years after it was constructed. They’re also paying for ongoing downtown maintenance and marketing through a separate special tax that’s renewed every five years.

As is suggested in the article by local leaders, perhaps this is simply the price of doing business in a popular suburban downtown: you chip in to help make the downtown better. This sort of public-private partnership can work well when there is a vibrant business scene. But, I could also imagine that these added costs make it more difficult for certain kinds of businesses to participate.

It would also be interesting to know how these streetscape improvements compare with efforts of others – whether municipalities or shopping centers – to improve their appearance and amenities. One way to view retail competition is as an arms race: who can create and foster the most vibrant scene? Who has the mix of stores, restaurants, recreational opportunities, parking, weather, and events that would lead consumers to go there rather than somewhere else? Not making such proactive improvements, even though they may be costly, could lead to falling behind.

Can you plan suburban growth around an Amazon distribution center?

Thanks to state tax breaks, Amazon will soon begin construction on a new distribution center in northeast Aurora. The new facility is said to bring 1,000+ jobs. The latest newsletter from the City of Warrenville discusses the new facility. The facility is located near the border with Warrenville and the city thinks this will be a good for Warrenville:

warrenvilletifamazon

Can an Amazon facility be an economic boon for a suburb, particularly in a portion of the community that is underdeveloped? At the least, the 1,000+ workers will have to live somewhere. Could there be certain facilities that pop up to serve the workers – fast food places? Gas stations? Dry cleaners? Tattoo parlors (wait, Warrenville has enough of those)? Adding students to the school system?

I’m sure the city is either working on estimates of this and it would be worth sharing with the public. Connecting the dots between a warehouse/distribution facility and other community amenities is not obvious and what is Warrenville willing to do to capitalize on this opportunity?

What if the best single display of America is Walmart?

In making several trips to Walmart in advance of Christmas, I found myself marveling several times at the store. Here are some reasons why this retail giant may be the best single illustration of America today:

  1. Consumerism rules. Each Walmart has so much stuff, from groceries to auto parts to Christmas trees to dinnerware. And Americans like this stuff even more if it is reasonably priced.
  2. On the flip side of consumerism, how can one company coordinate all that manufacturing and shipping to get items to each store? Walmart’s rise is due in part to their logistical abilities.
  3. Walmart is a great place to find stuff with which to go overboard for whatever holiday is coming up. Americans love Christmas, Halloween, Fourth of July, Easter…
  4. Walmarts generally require customers to drive there, often due to their locations in suburban or rural areas, the need for a good chunk of land, and helping shoppers to transport all the stuff they buy.
  5. Because of the prices and locations, Walmarts tend to attract a diverse set of shoppers.
  6. The company does not let workers unionize.
  7. The Sam Walton story is not exactly rags to riches but it does suggest that a hard worker with some new ideas can make something big of himself.
  8. Everyone has to eat and Walmart is the largest grocery chain in the United States.
  9. It is an iconic American brand though it hasn’t exactly caught on around the world like others (such as Coca Cola, McDonald’s, Nike).
  10. Everyone seems to have an opinion about its merits or flaws. Still, according to the company, “Every week more than 60 percent of Americans shop at Walmart.”
  11. It is convenient and ubiquitous for many: “About 90 percent of Americans live within 15 minutes of a Walmart store.
  12. The company’s size is hard to fathom:

    “And Wal-Mart’s heft is not just financial, it’s physical too. Its 4,600+ U.S. stores occupied almost 700 million square feet. That’s roughly enough space for 11,800 football fields. That means the entire population of Buffalo, New York, could suit up, split into teams and play football against each other simultaneously in Wal-Marts across the country.

    The company’s total revenue for fiscal 2016 was $482.1 billion. That’s enough to buy a gallon of milk every day for every person in Brazil for two years, based on the $2.89 price per gallon at the North Bergen, New Jersey, Wal-Mart.

    Wal-Mart’s costs and expenses hit $458 billion for the year, which is bigger than the budgets of all but four U.S. government departments. Here’s what the rankings would be:

    1) Health and Human Services
    2) Social Security
    3) Treasury
    4) Defense
    5) Wal-Mart.”

For better or worse, is Walmart America?